HEADNOTE:
Under the scheme of amalgamation and order of the High
Court under Sections 391 and 394 of the Companies Act, 1956
on 28.9.1962 one Indian Sugar Company was amalgamated with
the appellant-assessee company. The transferor company had
been allowed expenditure to the extent of Rs.58,734. The
appellant transferee company claimed exemption on the amount
of Rs.58,735 from income-tax for the assessment year of
1965-66 on the ground that the amalgamated transferee compa-
ny was not liable to pay tax under Section 41(1) of the
Income-tax Act, as the expenditure had been allowed to the
erstwhile transferor-company. The claim was disallowed by
the Income Tax Officer. The transferee-appellant company’s
appeal was also rejected by the Appellate Assistant Commis-
sioner. The appellant-company preferred appeal before the
Income Tax Tribunal which was allowed on the ground that
after amalgamation, the transferor company’s identity was
lost and it was no longer in existence and the transferee-
company was a different entity.
When the question was referred to the High Court, it
answered the reference in favour of the Revenue, holding
that on amalgamation of the two companies, neither of them
ceased to exist, instead both the companies continued their
entities in a blended form and the amalgamated company was a
successor-in-interest of the amalgamating company.
333
The Appellant Company’s application under Section 291 of
the Income-Tax Act read with Section 109, Code of Civil
Procedure was dismissed by the High Court.
Hence the present appeal.
Allowing the appeal of the assessee-Appellant company,
this Court,
HELD: 1. Section 41(1) has been enacted for charging tax
on profits made by an assessee, but it applies to the asses-
see to whom the trading liability may have been allowed in
the previous year. If the assessee to whom the trading
liability may have been allowed as a business expenditure in
the previous year ceases to be in existence or if the asses-
see is changed on account of the death of the earlier asses-
sees the income received in the year subsequent to the
previous year or the accounting year cannot be treated as
income received by the assessee. [146C-E]
2. In order to attract the provisions of Section 41(1)
for enforcing the tax liability, the identity of the asses-
see in the previous year and the subsequent year must be the
same. If there is any change in the identity of the assessee
there would be no tax liability under the provisions of
Section 41. [146E]
3. Two companies may join to form a new company, but
there may be absorption or blending of one by the other,
both amount to amalgamation. When two companies are merged
and are so joined, as to form a third company or one is
absorbed into the other or blended with another, the amalga-
mating company loses its entity. [147G]
4. After the amalgamation of two companies the transfer-
or company ceased to have any entity and the amalgamated
company acquired a new status and it was not possible to
treat the two companies as partners or jointly liable in
respect of their liabilities and assets. [148E]
5. The true effect and character of the amalgamation
largely depends on the terms of.the scheme of merger. But
there can be no doubt that when two companies amalgamate and
merge into one, the transferor company loses its entity as
it ceases to have its business. However, their respective
rights or liabilities are determined under the scheme of
amalgamation but the corporate entity of the transferor
company ceases to exist with effect from the date the amal-
gamation is made effective. [148H; 149A-B]
334
Commissioner of Income Tax, Madhya Pradesh v. Hukumchand
Mohanlal, 82 I.T.R. 624 (S.C.) and M/s. General Radio and
Appliances Co. Ltd. & Ors. v. M.A. Khader (dead) by L.rs.,
[1986] 2 S.C.C. 656; followed.
Halsbury’s Laws of England, 4th Edition Vol. 7 Para
1539; referred to.

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 91 of
1976.
From the Judgment and Order dated 15.4. 1975 of the
Punjab and Haryana High Court in I.T. Reference No. 14 of
1972.
Bishamber Lal and Ms. Geetanjali Madan for the Appellant.
Gauri Shanker, Manoj Arora, S. Rajappa and Ms. A.
Subhashini for the Respondent.
The Judgment of the Court was delivered by
SINGH, J. This appeal is directed against the judgment
and order of the Punjab and Haryana High Court dated
15.4.1975 answering the Income Tax Reference made to it by
the Income Tax Appellate Tribunal.
Briefly, the facts giving rise to this appeal are that
the appellant Saraswati Industrial Syndicate is a limited
company carrying on business of manufacturing and sale of
sugar and machinery for sugar mills and other industries.
Another company, namely, the Indian Sugar and General Engi-
neering Corporation (hereinafter referred to as ‘the Indian
Sugar Company’) was also manufacturing machinery parts for
sugar mills. On 28th September 1962 under the orders of the
High Court the Indian Sugar Company was amalgamated with the
appellant company. After the amalgamation, the Indian Sugar
Company lost its identity, as it did not carry on any busi-
ness. Prior to the amalgamation, the Indian Sugar Company
had been allowed expenditure to the extent of Rs.58,735 on
accrual basis in its earlier assessment. The company had
shown the aforesaid amount as a trading liability and the
said trading liability was taken over by the appellant
company. After amalgamation, the appellant company claimed
exemption on the amount of Rs.58,735 from income tax for the
assessment year 1965-66 on the ground that the amalgamated
335
company was not liable to pay tax under Section 41(1) of the
Income Tax Act 1961 (hereinafter referred to as ‘the Act’)
as the expenditure had been allowed to the erstwhile Indian
Sugar Company which was a different entity from the amalga-
mated company. The Income Tax Officer disallowed the appel-
lant’s claim for exemption. The assessee filed appeal before
the Appellate Assistant Commissioner who confirmed the order
of the Income Tax Officer. The assessee, thereafter, pre-
ferred appeal before the Income Tax Appellate Tribunal. The
Tribunal allowed the appeal on the construction of Section
41(1) of the Act. The Tribunal held that after the amalgama-
tion of the Indian Sugar Company with the assessee company
the identity of the amalgamating company was lost and it was
no longer in existence, therefore, the assessee company was
a different entity not liable to tax on the aforesaid amount
of Rs.58,735. On the Department’s application the Tribunal
referred the following question to the High Court:
“Whether on the facts and circumstances of the case the
Tribunal was justified in law in holding that the amount of
Rs.58,735 was not chargeable to tax under sub-section (1) of
Section 41 of the Income Tax Act 1961 for the assessment
year 1965-66?”
The High Court answered the question in favour of the Reve-
nue holding that the exemption from tax liability claimed by
the appellant assessee was chargeable to tax under Section
41(1) of the Act. The High Court held that on the amalgama-
tion of the two companies, neither of them ceased to exist
instead both the amalgamating companies continued their
entities in a blended form. It further held that the amalga-
mated company was a successor in interest of amalgamating
company and since the assets of both the companies were
merged and blended to constitute a new company the liabili-
ties attaching thereto must, therefore be, on the amalgamat-
ed company. On these findings the High Court held that the
amalgamated company, namely, the assessee was liable to pay
tax on Rs.58,735 which came into its hands from the assets
of the Indian Sugar Company. The assessee made application
before the High Court under Section 261 of the Act read with
Section 109 of the Code of Civil Procedure for certificate
to appeal to this Court but the High Court dismissed the
same. The appellant, thereupon, approached this Court by
means of special leave petition under Article 136 of the
Constitution. This Court granted leave. Hence this appeal.
Section 41(1) of the Act reads as under:
336
1(1). Whether an allowance or deduction has been
made in the assessment for any year in respect of loss,
expenditure or trading liability incurred by the assessee,
and subsequently during any previous year the assessee has
obtained. whether in cash or in any other manner whatsoever,
any amount in respect of such loss or expenditure or some
benefit in respect of such trading liability by way of
remission or cessation thereof, the amount obtained by him
or the’ value of benefit accruing to him, shall be deemed to
be profits and gains of business or profession and accord-
ingly chargeable to income tax as the income of that previ-
ous year, whether the business or profession in respect of
which the allowance or deduction has been made is in exist-
ence in that year or not .”
Section 41(1) has been enacted for charging tax on profits
made by an assessee, but it applies to the assessee to whom
the trading liability may have been allowed in the previous
year. If the assessee to whom the trading liability may have
been allowed as a business expenditure in the previous year
ceases to be in existence or if the assessee is changed on
account of the death of the earlier assessees the income
received in the year subsequent to the previous year or the
accounting year cannot be treated as income received by the
assessee. In order to attract the provisions of Section
41(1) for enforcing the tax liability, the identity of the
assessee in the previous year and the subsequent year must
be the same. If there is any change in the identity of the
assessee there would be no tax liability under the provi-
sions of Section 41. In Commissioner of Income Tax, Madhya
Pradesh v. Hukumchand Mohanlal, 82 ITR 624 this Court held
that the Act did not contain any provision making a succes-
sor in a business or the legal representative of an assessee
to whom the allowance may have been already granted liable
to tax under Section 41(1) in respect of the amount remitted
on receipt by the successor or by the legal representative.
ln that case the wife of the assessee on the death of her
husband succeeded to the business carried on by him. Another
firm which had recovered certain amounts towards the sales
tax from the assessee’s husband succeeded in an appeal
against its sales tax assessment and thereupon the firm
refunded that amount to the assessee which was received
during the relevant accounting period. The question arose
whether the amount so received by the assessee could be
assessed in her hands as a deemed profit under Section 41(1)
of the Act. This Court held that Section 41 did not apply
because the assessee sought to be taxed was not the assessee
as contemplated by Section 41(1) as the husband of the
asses-
337
see had died, therefore the Revenue could not take advantage
of the provisions of Section 41(1) of the Act.
The question is whether on the amalgamation of the
Indian Sugar Company with the appellant company, the Indian
Sugar Company continued to have its entity and was alive for
the purposes of Section 41(1) of the Act. The amalgamation
of the two companies was effected under the order of the
High Court in proceedings under Section 391 read with Sec-
tion 394 of the Companies Act. The Saraswati Industrial
Syndicate, the transferee company was a subsidiary of the
Indian Sugar Company, namely, the transferor company. Under
the scheme of amalgamation the Indian Sugar Company stood
dissolved on 29th October, 1962 and it ceased to be in
existence thereafter. Though the scheme provided that the
transferee company the Saraswati Industrial Syndicate Ltd.
undertook to meet any liability of the Indian Sugar Company
which that company incurred or it could incur, any liabili-
ty, before the dissolution or not thereafter.
Generally, where only one company is involved in change
and the rights of the share holders and creditors are
varied, it amounts to reconstruction or reorganisation or
scheme of arrangement. In amalgamation two or more companies
are fused into one by merger or by taking over by another.
Reconstruction or ‘amalgamation’ has no precise legal mean-
ing. The amalgamation is a blending of two or more existing
undertakings into one undertaking, the share holders of each
blending company become substantially the share holders in
the company which is to carry on the blended undertakings.
There may be amalgamation either by the transfer of two or
more undertakings to a new company, or by the transfer of
one or more undertakings to an existing company. Strictly
‘amalgamation’ does not cover the mere acquisition by a
company of the share capital of other company which remains
in existence and continues its undertaking but the context
in which the term is used may show that it is intended to
include such an acquisition. See: Halsbury’s Laws of Eng-
land, 4th Edition Vol. 7 Para 1539. Two companies may join
to form a new company, but there may be absorption or blend-
ing of one by the other, both amount to amalgamation. When
two companies are merged and are so joined, as to form a
third company or one is absorbed into one or blended with
another, the amalgamating company loses its entity.
In M/s. General Radio and Appliances Co. Ltd. & Ors.
v.M.A. Khader (dead) by Lrs., [1986] 2 S.C.C. 656, the
effect of amalgamation of
338
two companies was considered. M/s. General Radio and Appli-
ances Co. Ltd. was tenant of a premises under an agreement
providing that the tenant shall not sub-let the premises or
any portion thereof to anyone without the consent of the
landlord. M/s. General Radio and Appliances Co. Ltd. was
amalgamated with M/s. National Ekco Radio and Engineering
Co. Ltd. under a scheme of amalgamation and order of the
High Court under Sections 391 and 394 of Companies Act,
1956. Under the amalgamation scheme, the transferee company,
namely, M/s. National Ekco Radio and Engineering Company had
acquired all the interest, rights including leasehold and
tenancy rights of the transferor company and the same vested
in the transferee company. Pursuant to the amalgamation
scheme the transferee company continued to occupy the prem-
ises which had been let out to the transferor company. The
landlord initiated proceedings for the eviction on the
ground of unauthorised sub-letting of the premises by the
transferor company. The transferee company set up a defence
that by amalgamation of the two companies under the order of
the Bombay High Court all interest, rights including lease-
hold and tenancy rights held by the transferor company
blended with the transferee company, therefore the transfer-
ee company was legal tenant and there was no question of any
sub-letting. The Rent Controller and the High Court both
decreed the landlord’s suit. This Court in appeal held that
under the order of amalgamation made on the basis of the
High Court’s order, the transferor company ceased to be in
existence in the eye of law and it effaced itself for all
practical purposes. This decision lays down that after the
amalgamation of the two companies the transferor company
ceased to have any entity and the amalgamated company ac-
quired a new status and it was not possible to treat the two
companies as partners or jointly liable in respect of their
liabilities and assets. In the instant case the Tribunal
rightly held that the appellant company was a separate
entity and a different assessee, therefore, the allowance
made to Indian Sugar Company, which was a different asses-
see, could not be held to be the income of the amalgamated
company for purposes of Section 41(1) of the Act. The High
Court was in error in holding that even after amalgamation
of two companies, the transferor company did not become
non-existent instead it continued its entity in a blended
form with the appellant company. The High Court’s view that
on amalgamation ‘there is no complete destruction of corpo-
rate personality of the transferor company instead there is
a blending of the corporate personality of one with another
corporate body and it continues as such with the other is
not sustainable in law. The true effect and character of the
amalgamation largely depends on the terms of the scheme of
merger. But there cannot be any doubt that when two compa-
nies
339
amalgamate and merge into one the transferor company loses
its entity as it ceases to have its business. However, their
respective rights of liabilities are determined under scheme
of amalgamation but the corporate entity of the transferor
company ceases to exist with effect from the date the amal-
gamation is made effective.
In view of the above discussion, we agree with the
Tribunal’s view that the amalgamating company ceased to
exist in the eye of law, therefore the appellant was not
liable to pay tax on the amount of Rs.58,735. The appeal is
accordingly allowed and we set aside the order of the High
Court and answer the question in favour of the assessee
against the Revenue. There will be no order as to costs.
V.P.R Appeal allowed.
340